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Securing Loans for Clients When You’re Independent

By Walecia Konrad March 16, 2017

Offering the loans clients need can be a big stumbling block to going independent, says Matt Sonnen, founder and CEO of El Segundo, Calif.-based PFI Advisors. Formerly of Merrill Lynch and Luminous Partners, Sonnen and his wife formed PFI Advisors in 2016 to provide start-up services to independent advisors.

“Breakaway advisors worry that they’ll have trouble finding customized loans for clients at competitive rates,” he says. “They worry about giving up the one-stop shopping.”

In reality, more and more custodians and other financial institutions are willing to do business with independent RIAs. They offer securities-based loans along with margin, mortgage and cash management loans at good rates.

“Custodians and big banks don’t want to miss out on the growing breakaway business,” he says. But an important first step to going independent is transitioning clients to the new firm — both their securities and any loans and lines of credit tied to those investments. It’s vitally important to find a custodian who will help you move clients by recreating the same loans and credit lines at the same rate or better, explains Sonnen.

Advisors must learn to shop around now that they have more choices compared to the fixed menu of options at their old firms. It will take time and effort to look for the best rates and terms, but those additional costs are balanced out by the potential for more individualized options and easier approvals, says Lorenzo Esparza, founder and CEO of Manhattan West Asset Management, in Manhattan Beach, Calif. Esparza broke away from JPMorgan to start Manhattan West, which launched in June 2016 and now manages $300 million.

In a big wirehouse, “there are layers of authorizations you have to get. Sometimes you talk to the local person in your office, and then you have to talk to someone else higher up, and then on and on,” Esparza explains. “Now with my custodian, I pick up the phone and say, ‘Hey I need this, can you do it?’ and the answer is usually yes. We have $70 million to $80 million in credit lines outstanding. The lending process is dramatically better.”

Esparza says that while at his former firm, he would often pitch clients saying he could offer everything they needed, such as investment management and estate planning services, but lending was a different issue. “You run into a problem when a bank doesn’t want to do a loan. That came back to bite me on several occasions,” he says.

Margaret Dechant

Esparza recalls the time one of his wealthy former clients wanted help securing a $15 million aircraft loan. “Forget it. That was never going to happen,” Esparza says. “I didn’t like being in an environment where I had to say no a lot. Now, at our firm, we can keep looking for solutions that work for the client.”

Of course, all the extra flexibility and choice means more back-office and administrative work for the independent advisor — which can add items to an already massive to-do list. “You’ve got to be ready,” says Margaret Dechant, CEO of Wichita, Kans.-based 6 Meridian. She and six colleagues left Morgan Stanley to form 6 Meridian in September 2016, and now manage $1.9 billion in assets. “Setting up good lending is one of the best ways you can make switching less inconvenient for clients,” she advises.

Dechant says she and her partners had to dig deep to find a custodian who would accommodate potential clients’ lending needs, although she points out that the situation may have improved even in the short time since she began planning her move.

Lending is an important part of the breakaway conversation independent advisors need to have with clients, she says. “It’s not the firm clients necessarily have the attachment to, it’s the person. Explaining to a client that you can offer more on an independent basis, including where lending is concerned, is part of the story. As far as paperwork and logistics, we try to make it that as easy on clients as we can.”